Saturday, August 15, 2009

Consumer prices in many sectors of the economy are falling, signaling we're moving into deflation. The WSJ etc. is trying to paint this as a good thing, but as I've repeatedly pointed out, deflation drives money out of circulation and turns it into mattress stuffing because people quit buying, waiting for prices to fall even further, and take the money out of banks because there's no reason to keep it in a bank if the bank can't pay you interest because there are negative real interest rates (which is what happens during deflation). Without money in banks available for lending, capitalism slows to a halt -- bank lending is how a capitalist system pays for the capital expenditures for future output using the cash generated by that future output and thus allows a capitalist system to swiftly adjust supply of items to match demand. Without that ability to swiftly adjust supply to meet demand, capitalism grinds to a crawl as businesspeople must then wait to slowly accumulate the capital to adjust their supply to meet demand.

And in fact consumer spending is also still well below last year's levels, where, remember, we were already in recession. The only reason the unemployment rate didn't go up is that so many people were forced to take temporary part-time jobs because their unemployment benefits had run out, but a $5.95/hour job for 15 hours a week as a sandwich artist at Subway isn't going to bring this economy out of recession and is "employment" only by the most stretched use of the word. And in fact the U-6 unemployment rate is unchanged, all that happened was that these people were no longer listed in the U-3 rate because they'd moved to the U-6 as "marginally attached" workers.

It is unclear how we're going to get out of this death spiral. Perhaps health care reform will help, since it will trigger a burst of health care spending as people currently locked out of the health care system suddenly get access, but the Rethugs are doing their best to stop that from happening via threats and disruptions. The only good news is that France and Germany are now out of recession and have growing economies again. Of course, that's good for them, but not so good for us, since we don't export diddly to France and Germany.

We need to do something to create jobs, to get people spending again, and get the economy moving. The stimulus is now slowly trickling into play, remember the Federal contracting cycle takes six months so we're just starting, so that's going to help. And the Cash for Clunkers program has had astounding bang for the buck -- automakers are going to be working overtime to replace the cars bought as a result of that program, keeping people employed all the way from assembly plants to steel suppliers. But we blew a $4 TRILLION hole in the economy with the housing bust, and we've only patched up maybe 2/3rds of that. We're still at risk of a deflationary spiral, yet so-called "serious economists" (i.e., all the economists who were wrong, as vs. people like Paul Krugman and Nouriel Roubini who were right) whine about imaginary inflation.

And it has become utterly clear that a) President Barack Obama is no President Franklin D. Roosevelt, he seems far too conservative to do the drastic things needed to get the economy moving again, b) Obama appears to be taking far too much advice from the very people who are responsible for the current crisis, and c) Congress is a joke. The Republicans spend all their time attempting to sabotage all efforts to end the crisis (apparently the suffering of their fellow Americans is of no concern to them, they literally care more about partisan hackery than about doing good for America and Americans), and the Democrats are a coalition of smaller parties spending more time in infighting than in getting things done. If I sound as hang-dog as Paul Krugman now, it's with reason. Our political system has ground to a halt and turned into a circus freak sideshow with "teabaggers" and "deathers" and Caribou Barbie and other such circus freaks running around to scare small children and miscellaneous pets, and our economy's "green shoots" look more like sickly tendrils about to expire under the heat of the sun.

In short, we are fucked, but good, unless something happens next month in Congress that is really unexpected. I'm not holding my breath.

15 comments:

Oh, I saw this coming back in late November, when it was clear that Geithner and Summers would run the show. I've never taken so little pleasure in being right. I wish I'd been wrong. I wish *you* were wrong! But there's just no way "more of the same" is gonna help us.

It's like the forces of chaos are prevailing in the U.S. Entropy rules. Nothing is going to get done, except for giving more dollars to the bank maggots, because the anarchy party prevails. American politics has descended into the equivalent of a toddler's tantrum. Angry gun-toting white people are being egged on by sensation-seeking media geek shows like Glenn Beck and Lou Dobbs. This intimidates feckless politicians like Blue Dog Democrats and the spineless Obama.

What you're seeing is like when Samson pulled down the temple of the Philistines. Yeah, he destroyed the enemies who were keeping him in blinded captivity, but he also killed himself. The raging white mobs will get what they want -- no government action on anything. America will continue to fall into the pit. The screaming crackers deserve the homelessness, starvation and gunfire deaths they will get -- and a lot of them will die by their own hands when they've lost everything -- but it's a shame thay'll drag so many down with them.

Your only hope is to prepare for the worst and hope to ride it out as best you can, Tux and company. As always, I'm so glad I'm outta there. I just wish we weren't moving back so close to the frying pan.

Deflation also results in falling WAGES. Nearly everyone who has lost a job and found another is taking a lower wage (I sure am), or is only working part time. So, yay, flat-screen TVs from China are getting cheaper all the time, but it costs more to put gas in my car and groceries every time, and on a lower wage.

Prices for essential goods are NOT falling.

Deflation is a vicious, cruel thing. Pundits think it's good because everything's a bargain now for rich people. Deflation + debt is death. Paying off a debt in 2006 $ with half your earnings in 2009 is going to hurt.

I too saw this happening, got totally out of stock funds in 401k/IRA before the '08 fall crash and am still sitting in cash/GNMAs, because this insane rally off the March lows isn't based on anything concrete. The p/e on the S&P 500 is around 140, which is clearly fantasy land. Earnings suck. The p/e should be around 15.

Oh, and the CARS program looks good on paper but all it did was yank future demand backwards. Where will demand come from in 2010/11? Sales are high because a lot of people aren't turning down what appears to be free money (by taking on a new car loan... jeez).

It also sucks for taking good, usable cars off the road and completely destroying them. It sucks for people who can't or won't buy a new one, and for people who rely on used parts to repair their cars. A crushed car with a deliberately-seized engine is of zero value except to the smelter who might offer $50.

Yeah sure it's taking actual smoking, leaking, gas-guzzling clunkers off the road, but most of the cars aren't in bad shape, and for a lot of people it's rewarding their bad decisions (ooo! I wanna Ford Expedition! No wait! Bigger!), same as rewarding people who took out toxic mortgages on far more house than they could actually afford.

@42 is correct I used the CARS program and all it did was drive my car purchase ahead a couple years. And probably tipped me to buying new rather than another used car.

Also the criticism of the CARS program destroying perfectly useful items is well founded. The program should have been crafted to require the disassembly of the turned in vehicles to enable spare parts for people still driving those vehicles. And all $$$ generated from the sale of those parts should have gone back to off-set the cost of the program or help fund it futher.

Taking all the parts from the used cars may be a boon for the steel recyclers , but it shafts the rest of us right where it hurts . I drive a 93 pickup because I need a pickup and the last time I had any money to spend was in 2000 when I bought it . A lot of low priced used parts would have given my poor truck a lot of benifit at 280,000 miles . Yea , the economy seems F'd , big time . The Banks are awash in funds for investments , whoop de doo . How about Gas and Food and Basic necessities , higher than ever . I've lived low , since I left my parents but this is starting to hurt . How are they going to get a stimulus to people like me ? At 55 and hurting a death panel sounds OK . w3ski

You made the comment that Obama is no FDR - which is true. But if you look at history, FDR was elected AFTER we had been in the depression for 3 years, a depression much deeper and severe than we can imagine. People were desparate, and I think the politicos knew than that the USA was a tinder box, one match away from chaos and the guilotine. Obama can't get away with nearly as much as FDR did. If the recession had started 3 years sooner, there would be less resistance.

On the bright side - Nissan is going to market in this country an electric car with a hundred mile range and the potential of a 26 minute recharge. They are agressively promoting the infrastructure to support electric cars. A Norwegian firm Think, is going to build a plant for an electric commuter car they are building in Europe - looks like the smart car. Obama is investing heavily in developing battery technology and manufacturing in the US - big bucks. Maybe someone will dust off the plans for the EV1 - a very nifty car that GM built and then dropped under pressure from big oil in 1990.

I have read promising theories about using electric cars to get the grid past peak - millions of cars plugged in to charge at work in LA discharging into the grid - it's something the electric coimpanies have wanted but never been able to engineer - storing energy in non-peak times to get a major metro area past peak.

There's plenty to be discouraged about, but plenty that's changing for the better or in flux. The last 6 months are only the test parries of fighters who are in a war that will last nearly a decade. It's way early to call the fight.

BT - hipparchia is right. You are an optimist. And TampaDoug - you are playing Pollyanna. Or maybe Dr. Pangloss.

Germany's recovery is non-existent. Going from 93.8 to 94.1 is nothing better than a plateau. Besides, two points do not a trend line make. And if we have to rely on Japanese and Norwegian innovation to pull us forward - well . . . I'm going to have a hard time choosing between the lutefisk and the sashimi, on my way to the vomitorium.

Sungold, I'd hoped Geithner and Summers had more brains than a silly bird brain, alas, my hope turned out futile.

Hipparchia, healthcare reform isn't going to result in a burst of spending anyhow, because we don't have the doctors. The only major-economy OECD nation with fewer doctors per capita than the USA is Canada. The AMA capped residencies for many years while whining about an "oversupply" of doctors in order to drive up doctor's wages. Now we reap the results of their greed.

Bukko: We are reaping the crazy from the crazy tree alright. Problem is, the adults seem to be reacting rather than taking charge. Baffling.

42: Yes, I've noted that aspect of a deflationary spiral before (the fact that price and wage *deflation* is the same thing as debt *inflation*). Regarding the Cash for Clunkers program, yes, it moves future spending backwards to now. But now is when we need it. And there is an argument to be made that Cash for Clunkers is instead moving delayed spending to the present -- i.e., all the cars that were not bought these past two years because people couldn't obtain financing or were worried about their jobs, are being bought now.

Bosconet, since now is when we need the stimulus effect, not two years from now when the economy has recovered, the program did exactly what it was supposed to do. 'Nuff said on that.

w3ski, the goal was to stimulate spending on NEW cars, not to stimulate spending on OLD cars. Spending on new cars rampages through the economy, from sales to manufacturing to steel making to iron and coal mining. Your intent on keeping your old car is laudable from a microeconomic perspective, but from a macroeconomic perspective what we need is jobs, and stripping parts off of clunkers for your old car provides much fewer jobs than making new parts for your clunker.

Tampa: Best case scenario I see is that we settle in for a long Japanese-style "lost decade" where the economy is in the doldrums and unemployment remains at unacceptable levels. The actions of this administration, and the last four months of the Bush administration, headed off a new Great Depression, but that's just the worst case scenario. We are still facing potentially years of misery, because the American consumer has completely re-set his spending levels to a new level of austerity and the nation as a whole is pretty much insolvent.

Jazzbumpa: Yeppers, housing prices still have plenty to fall. We need to get housing back to where it is affordable on the average family income of various areas. For example, average family income here in the SF Bay area is around $85K/year. No friggin' way will that buy a typical $800K home around here or even a $450K townhome. (Note -- two years ago, add $300K to both of those prices). $85K will buy $255k of home max under conservative lending practices, meaning we still have a *long* ways to fall... and each time housing falls, it is just that much more deflation to add to the deflationary pressures facing the economy.

In 1983 the federal government changed the CPI calculation for housing. Prior to 1983 the CPI used a national estimate of home prices. In order to smooth out volatility this component was changed to owners equivalent rent, which accounts for 23% of the CPI. In the last 12 months owners equivalent rent has been estimated to rise 1.9% and has added a positive .4% to the overall CPI.

If home prices were used our CPI would be minus 6% rather than minus 2% over the last 12 months. We have not seen this level of deflation since 1929-1933.

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